Oil Market Update by John Kemp at Reuters - Feb 4
Posted: Thu Feb 04, 2021 2:48 pm
Escalating oil prices signal need for more output: by John Kemp - Reuters News
04-Feb-2021
John Kemp is a Reuters market analyst. The views expressed are his own. My comments are in blue.
By John Kemp
LONDON, Feb 4 (Reuters) - Rapidly rising oil prices are signaling the need for more production in the second half of the year to halt the fall in global inventories and satisfy recovering consumption as epidemic-related travel restrictions ease. < As I have been telling you for months in my podcasts, the falling OECD oil inventories will be the PRIMARY DRIVER of oil prices.
Global petroleum stocks have fallen by almost 600 million barrels since May 2020, after rising by over 1.2 billion barrels in the previous five months as a result of the epidemic and lockdowns. < Goldman Sachs now says global oil and refined products inventories are declining by 900,000 barrels per day and the rate of decline will accelerate in Q2.
Stocks are expected to decline by a further 140 million barrels over the rest of the year, according to estimates prepared last month by the U.S. Energy Information Administration ("Short-term energy outlook", EIA, Jan. 12).
Inventories are likely to end 2021 several hundred million barrels above the level at the end of 2019, before coronavirus struck, but that was a relatively tight baseline against which to measure stock levels. < My guess is that inventories will fall much faster in Q2 than the EIA estimate, if the Covid-19 vaccines work.
The expected production shortfall in the rest of this year, and inventory draw down, has already been reflected in the sharp rise in front-month futures prices and the shift in calendar spreads into a significant backwardation.
Brent prices have climbed by almost $20 barrel (50%) since the announcement of the first successful coronavirus vaccine trial at the start of November, to the highest level for almost a year.
And Brent's six-month calendar spread has swung into a backwardation of more than $2.20 per barrel (the 80th percentile for all trading days since 1990) from a contango of $2.50 (which was only the 18th percentile).
The spread is at its tightest since January 2020, before the epidemic and the Saudi-Russian volume war sent the oil industry into a slump.
The rapid escalation in spot prices and tightening in spreads is consistent with a market climbing towards a cyclical peak, and signaling the need for more output to relieve expected future shortfalls.
PRODUCTION RAMP UP
Oil producers have already started to respond to the rise in prices, albeit it cautiously and from a low base, by increasing exploration expenditure and drilling programs, especially in the United States. < Not sure where John gets this idea, but none of the upstream companies that I follow have announced a significant increase in their drilling programs.
The number of rigs drilling for oil in the United States has increased by 123 (72%) in a little over five months, according to oilfield services firm Baker Hughes. < True, but still down 380 rigs drilling for oil from where the rig count was a year ago; 675 down 380 to 295 as of 1/29/2021. The U.S. needs ~500 rigs drilling for oil to stabilize production.
The rig count is still down by around 380 compared with the same period last year, but it is trending steadily upwards, with increases in 18 out of the last 19 weeks. Experience suggests the rig count responds to price changes with an average lag of 4-6 months, which allows for delays in decision-making, contracting and moving equipment to the well site and setting it up.
The rise in the rig count so far mostly reflects rising prices during the second and third quarters of 2020, as they bounced back from lows in April and May 2020.
The more recent price surge since November is expected to keep the rig count climbing throughout the first and second quarters of 2021. < Very bullish for SOI, which I just updated today.
There is normally an additional delay of six to nine months from the moment when rigs start to drill to the point where new wells begin to flow commercially, so output is likely to increase through the rest of the year. < Development wells drilled in areas that have adequate pipeline access can be turned to sales much quicker.
U.S. oil production is expected to hit a cyclical low this month, stabilise, and then increase gradually in the second half of 2021 and throughout 2022.
Last month, the EIA forecast U.S. domestic production would increase by nearly 800,000 barrels per day (bpd) between February 2021 and December 2022.
But the continued upward pressure on prices and calendar spreads implies traders do not think the anticipated increase in U.S. production will be enough to meet increased consumption and inventories.
SPOTLIGHT ON OPEC+
Escalating prices signal the need for a significantly faster ramp-up in U.S. production, or an increase in output from OPEC members and their partners in the expanded OPEC+ group.
In the last decade, whenever real Brent prices have been at $60 or higher, shale producers have increased their output to fill the production-consumption gap, capturing market share from OPEC. < Not likely now since much of the Tier 1 leasehold has been drilled. Only the Permian Basin has significant production upside.
Last year, when prices and spreads were close to current levels, Russia and Saudi Arabia fell out over production policy, triggering an ill-timed volume war in March and April, just as the epidemic reached its first peak. Russia pushed for output increases to protect market share, while Saudi Arabia pressed to continue restricting output in the hope of pushing prices higher.
The market is now back to the same critical price and spread threshold where divisions over strategy are likely to re-emerge. < All OPEC+ has to do is keep it together for six months and they will control the global oil market. Biden's ban on drilling permits on Federal land makes it all but impossible for the U.S. to get back to the peak production set in November, 2019. Energy Independence is back on the "Dream Shelf".
04-Feb-2021
John Kemp is a Reuters market analyst. The views expressed are his own. My comments are in blue.
By John Kemp
LONDON, Feb 4 (Reuters) - Rapidly rising oil prices are signaling the need for more production in the second half of the year to halt the fall in global inventories and satisfy recovering consumption as epidemic-related travel restrictions ease. < As I have been telling you for months in my podcasts, the falling OECD oil inventories will be the PRIMARY DRIVER of oil prices.
Global petroleum stocks have fallen by almost 600 million barrels since May 2020, after rising by over 1.2 billion barrels in the previous five months as a result of the epidemic and lockdowns. < Goldman Sachs now says global oil and refined products inventories are declining by 900,000 barrels per day and the rate of decline will accelerate in Q2.
Stocks are expected to decline by a further 140 million barrels over the rest of the year, according to estimates prepared last month by the U.S. Energy Information Administration ("Short-term energy outlook", EIA, Jan. 12).
Inventories are likely to end 2021 several hundred million barrels above the level at the end of 2019, before coronavirus struck, but that was a relatively tight baseline against which to measure stock levels. < My guess is that inventories will fall much faster in Q2 than the EIA estimate, if the Covid-19 vaccines work.
The expected production shortfall in the rest of this year, and inventory draw down, has already been reflected in the sharp rise in front-month futures prices and the shift in calendar spreads into a significant backwardation.
Brent prices have climbed by almost $20 barrel (50%) since the announcement of the first successful coronavirus vaccine trial at the start of November, to the highest level for almost a year.
And Brent's six-month calendar spread has swung into a backwardation of more than $2.20 per barrel (the 80th percentile for all trading days since 1990) from a contango of $2.50 (which was only the 18th percentile).
The spread is at its tightest since January 2020, before the epidemic and the Saudi-Russian volume war sent the oil industry into a slump.
The rapid escalation in spot prices and tightening in spreads is consistent with a market climbing towards a cyclical peak, and signaling the need for more output to relieve expected future shortfalls.
PRODUCTION RAMP UP
Oil producers have already started to respond to the rise in prices, albeit it cautiously and from a low base, by increasing exploration expenditure and drilling programs, especially in the United States. < Not sure where John gets this idea, but none of the upstream companies that I follow have announced a significant increase in their drilling programs.
The number of rigs drilling for oil in the United States has increased by 123 (72%) in a little over five months, according to oilfield services firm Baker Hughes. < True, but still down 380 rigs drilling for oil from where the rig count was a year ago; 675 down 380 to 295 as of 1/29/2021. The U.S. needs ~500 rigs drilling for oil to stabilize production.
The rig count is still down by around 380 compared with the same period last year, but it is trending steadily upwards, with increases in 18 out of the last 19 weeks. Experience suggests the rig count responds to price changes with an average lag of 4-6 months, which allows for delays in decision-making, contracting and moving equipment to the well site and setting it up.
The rise in the rig count so far mostly reflects rising prices during the second and third quarters of 2020, as they bounced back from lows in April and May 2020.
The more recent price surge since November is expected to keep the rig count climbing throughout the first and second quarters of 2021. < Very bullish for SOI, which I just updated today.
There is normally an additional delay of six to nine months from the moment when rigs start to drill to the point where new wells begin to flow commercially, so output is likely to increase through the rest of the year. < Development wells drilled in areas that have adequate pipeline access can be turned to sales much quicker.
U.S. oil production is expected to hit a cyclical low this month, stabilise, and then increase gradually in the second half of 2021 and throughout 2022.
Last month, the EIA forecast U.S. domestic production would increase by nearly 800,000 barrels per day (bpd) between February 2021 and December 2022.
But the continued upward pressure on prices and calendar spreads implies traders do not think the anticipated increase in U.S. production will be enough to meet increased consumption and inventories.
SPOTLIGHT ON OPEC+
Escalating prices signal the need for a significantly faster ramp-up in U.S. production, or an increase in output from OPEC members and their partners in the expanded OPEC+ group.
In the last decade, whenever real Brent prices have been at $60 or higher, shale producers have increased their output to fill the production-consumption gap, capturing market share from OPEC. < Not likely now since much of the Tier 1 leasehold has been drilled. Only the Permian Basin has significant production upside.
Last year, when prices and spreads were close to current levels, Russia and Saudi Arabia fell out over production policy, triggering an ill-timed volume war in March and April, just as the epidemic reached its first peak. Russia pushed for output increases to protect market share, while Saudi Arabia pressed to continue restricting output in the hope of pushing prices higher.
The market is now back to the same critical price and spread threshold where divisions over strategy are likely to re-emerge. < All OPEC+ has to do is keep it together for six months and they will control the global oil market. Biden's ban on drilling permits on Federal land makes it all but impossible for the U.S. to get back to the peak production set in November, 2019. Energy Independence is back on the "Dream Shelf".